Top forecasters see severe recession

Award-winning economist Jim O'Sullivan of UBS takes no solace in the accuracy of his long-standing forecast that the housing bubble would severely impact the U.S. economy. "It is what it is, whether we forecast it or not," O'Sullivan said. "It's a painful time on Wall Street."

O'Sullivan and his boss, Maury Harris, won their fifth Forecaster of the Month award from MarketWatch in September, beating 44 of their peers in the monthly contest that honors those who've done the best job of forecasting the tricky monthly numbers that most move financial markets.

Harris and O'Sullivan think the U.S. economy will be weaker for the next five or six months before a gradual recovery in the second half of the year behind further significant actions by the Federal Reserve to unfreeze the credit markets and stimulate growth again. They expect the Fed to lower its target interest rate to 1% (from 1.5% currently) and provide even more support to financial firms and credit markets through special lending and liquidity operations.

The Fed "will do what has to be done" to maintain a functioning financial system, O'Sullivan said. There's "an awful lot more they can do," he said, adding "They do get it." The recession will be "much more severe than the last two," although he suggests that any comparison with the Great Depression is ludicrous.

The unemployment rate peaked at about 25% in the Thirties; he sees the official unemployment rate rising to about 7.3% late next year from 6.1% now. Measured by the expected 0.8% decline in gross domestic product, this recession is likely to be milder than the average 2% drop in post-World War II recessions.

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